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Yuan = World Currency, Next?

Last night, the general
meeting of executive directors of the International Monetary Fund (IMF) decided
that the chinese currency, Yuan (also called Renminbi), to be included as one
of the world reserve currency, effective from October 1, 2016. In the new calculation
of special drawing rights (SDR), Yuan weighs 10.9%, or greater than the weights
of Britain Pound Sterling or Japanese Yen, but still much lower than the weights
of US Dollar and Euro. You can read the explanation of SDR in this article.

Here are the weights
for each currency in the calculation of SDR, before and after the entry of
Yuan.

Currency

Before (%)

After (%)

US Dollar

41.9

41.7

Euro

37.4

30.9

Chinese Yuan

-

10.9

Japanese Yen

9.4

8.3

Pound Sterling

11.3

8.1

Total

100.0

100.0

The question is, what
is the impact of the IMF's decision on the Indonesian economy (if any),
including on Jakarta Composite Index (JCI)?
When yesterday the JCI dropped 2.5% in one day, does it related to this?

Last Monday, in the
pre-closing session, some foreigners suddenly sell their stocks in large amount
until the JCI finally closed at 4,446 or dropped 2.5%, while during the day the
index was quite stable in the position of 4,520’s. The biggest seller was
Merrill Lynch, which sold its holdings worth Rp2.3 trillion (about US$ 200
million), but some of them are bought by foreign investors as well (so that the
net foreign sell in Monday was only Rp1.5 trillion).

Then why Merrill sell
off? Nobody knows, but a plausible explanation is that they may rebalance their
portfolio composition in accordance with the weights of Indonesian stocks in
the MSCI Indonesia Index (MSCI =
Morgan Stanley Capital International). Earlier on November 11, the stock of HM
Sampoerna (HMSP) is included in the calculation of MSCI Indonesia Index, with a
weighting of 3.2% (so the price movement of HMSP will have effect of 3.2% on
the movement of the index), and the inclusion of HMSP was automatically reduces
the weight of other stocks to the calculation of the MSCI, for example, Bank
Mandiri (BMRI), which its weight dropped from 7.4 to 6.8%. However, some stocks
such as Astra International (ASII), the weight was still rising from 10.8 to
11.4%.

Here are the new weights
of each stocks in the MSCI Indonesia Index (there are 31 stocks including
HMSP), the blue ones are has its weight increased.

Stocks

Before (%)

After (%)

Bank BCA

14.0

13.8

Telkom

11.7

11.8

Astra
International

10.8

11.4

Bank BRI

10.5

10.1

Bank Mandiri

7.4

6.8

Unilever Indonesia

5.0

4.7

HM Sampoerna

-

3.3

Bank BNI

3.3

3.1

Matahari Dept.
Store

3.2

3.1

United Tractors

2.9

2.6

Semen Indonesia

2.7

2.6

PGN

2.8

2.6

Kalbe Farma

2.6

2.5

Indocement

2.6

2.3

Indofood Sukses
Makmur

2.3

2.1

Lippo Karawaci

2.2

2.0

Gudang Garam

1.9

1.9

Surya Citra Media

1.6

1.6

Charoen Pokphand

1.6

1.6

Indofood CBP

1.3

1.3

Summarecon

1.4

1.2

Bumi Serpong Damai

1.1

1.1

Tower Bersama

1.2

1.1

Jasa Marga

0.9

0.9

Bank Danamon

0.9

0.8

XL Axiata

0.8

0.8

Adaro

0.8

0.8

Media Citra Nusantara

0.7

0.7

Astra Agro

0.7

0.6

Global Mediacom

0.6

0.5

TB Bukit Asam

0.5

0.5

Total

100.0

100.0

And MSCI Indonesia
Index is a benchmark that is most widely used by international investors in putting
their investments here. So when the components of the index has changed, most
of the foreign fund managers will also change the composition of their
portfolios, where they buy HMSP or add more ASII and, on the contrary, reducing
their positions in stocks that weighs down, or sell out stocks that no longer
being components of the index. And that’s what Merrill Lynch did yesterday
where they sell BMRI etc., only they did it in a single day so that the JCI
fell deeply.

So if the above theory
is correct, the market drop in Monday has nothing to do with the meeting of IMF.
However, the action of Merrill Lynch might explain what will likely to happen
after Yuan established as one of world currencies, and here’s the explanation:

Investors from worldwide
look at currencies that became the components of SDR in the same way as they
look at stocks that become the components of MSCI Indonesia Index. So after Yuan
was declared as a new component of SDR, the financial institutions around the
world will begin to put their assets denominated in Yuan, just like when
Merrill Lynch (and also other foreign investors) began buying shares of HMSP
after HMSP be a component of MSCI Indonesia Index. On the other hand they will reduce
their ownerships in assets denominated in US Dollar, Euro, Yen and Pound
Sterling, because the weight of these four currencies (toward SDR) has been
down. As a result, from this day onwards, the exchange rate of Yuan against USD
will possibly up, while the exchange rate of the Euro, Yen, Pound, and the USD
itself against many other currencies around the world, will go down. And
indeed, on Tuesday, the USD was dropped against IDR (Indonesian Rupiah), but
the IDR itself is dropped against RMB (Renminbi).

But will the US Dollar
fall after Yuan is listed as one of the world currencies? Well, no, because the
weight of the USD against SDR, as you can see above, only down slightly from
41.9 to 41.7%. Currency that weighs down the most was the Euro, from 37.4% to
30.9%, probably because in the last five years (since the IMF has changed the weight
of components of the SDR in 2010), the Chinese economy has advancing rapidly,
while the European economy is no longer dominant as before, even disturbed by
the Greek Crisis etc. While the US? Still strong until today, and the size of
its GDP is still the largest in the world, so there is no reason for investors
around the world to convert their assets from USD denominated to Yuan. But for
investors from Japan and the UK, they might start to less confident with their
own currencies (which now weighs less than Yuan), and will probably start collecting
Yuan while still keep the US Dollar.

Okay, but it does not
answer the question: What is the impact of this Yuan issue toward Indonesia, if
any? Well, because the weight of the USD towards SDR only dropped slightly, the
foreign investors in here won’t get out if the reason was only because they
have to convert their US Dollar to Yuan (so they have to sell their stocks
first), although some of them may still do it anyway. But clearly the impact on
JCI should be minimal, unless there are a lot of foreign investors from the
European Union, the United Kingdom, or Japan who also invest here.
Unfortunately there is no exact data about the investor from any participating
country to buy shares in Indonesia.

However, in terms of
the macro economy, China has been the largest trade partner for Indonesia, that
throughout 2014, Indonesia exported non-oil goods worth US$ 16.5 billion to
China, the biggest compared to exports to any other country, and vice versa,
imported non-oil goods worth US$ 30.4 billion from China, also the biggest
compared to imports from any other country. Now, with the rise of Yuan ‘status’,
it will ease the trade transactions between China and Indonesia, where exporters
from Indonesia no longer need to change Rupiah into US Dollar (and the importers
from China will change it later into Yuan), but can directly convert it to Yuan,
and vice versa.

So in the future, it is
likely that the value of exports and imports between the two countries will
increase, and it could mean two things: If Indonesia can export to China more
than receiving the imports, that would be a good for Indonesian economy. But if
Indonesia were flooded with imports from China, the economic growth will come
under pressure (read the explanation here).

And unfortunately the
value of Indonesia's imports from China in the last several years were always
greater than the value of exports, so I’m afraid that our country will get
flooded with imported goods. On the other hand, if the Chinese economy began to
accelerate once again because they can do business easier with other countries
(because they now can use their Yuan abroad, without converted to USD first),
then their needs on coal and CPO will likely to increase back, and that means
good news for the mining and plantation sectors in Indonesia, which this year
has begun to.. dying. Whichever the case, we'll see.